SUMMARYOFTRACINGRULESS.28 LAW316SECUREDTRANSACTIONS October2006
Notes Whatfollowsismysummaryofthematerialsatpages191194ofCumingand WoodsBCPPSAHandbook forconveniencepurposesonly,Ihavenumberedtherulesandbrokensomeof themultiplepartrulesintoseparaterules dependingonthecircumstances,onlytheapplicablerulesareapplied assumewhereproceedsarementionedthattheitem(s)meetthePPSA definitionofproceedsandthattheprovisionsofsection28havebeenmet TheRules 1)Wheremoneyproceedsaredepositedintoanaccountandmixedwiththe Debtors(D)ownfunds,theentirefundissubjecttothesecurityinterest(SI)to theextentnecessarytorecognisetheproceedsclaim 2)Whenmoneyistakenfromthecommonfund,theDispresumedtospendhis ownmoneyfirst,unlessthenatureofthewithdrawalsaresuchthattheymustof necessitybewithdrawalsofproceeds 3)LOWESTINTERMEDIATEBALANCERULE InacommingledaccounthowtheSecuredParty(SP)determineswhatportion ofthefundsintheaccountbelongtoher Calledintermediatebalancerulebecausethisbalancefallsbetweentheactual amountoftheproceedsdepositedandthetotalamountintheaccount If,afterapplyingthepresumptionthatDwithdrawsownmoneyfirst,theaccount balancedipsbelowthetotalamountoftraceableproceeds,theSImustbe adjusteddownwards: (i)$50,000.00ofproceedsaredepositedintotheDsaccountand commingledwith$5000.00oftheDsownmoney (ii)Dwithdraws$30,000.00topayothercreditors (iii)$10,000.00bankloandepositedintotheaccount
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Example
Proceeds Deposited
Non-Proceeds Deposited $ 5,000
Withdrawals
Total Balance $ 5,000 $55,000
Proceeds Remaining in Account $ 0.00 $50,000 (a) $25,000 (b) $25,000 (c) $15,000 $ 0.00
(i) (ii) (iii) (iv) (v)
$50,000 $30,000 $10,000 (c) $20,000 $15,000
$25,000 $35,000 $15,000 $ 0.00
Notes (a)onlyproceedsfromtheSIraisestheproceedsbalanceintheaccount (b)shortfallof$25,000.00inproceedsatthispointproceedsamountis reducedbytheamountoftheshortfall (c)thisisnotproceedsandcantbeusedtoincreasetheproceedsamountinthe account 4)IfDwithdrawsmoneyinordertopurchaseinventoryorotherproperty,the SPisallowedtotraceherclaimintotheinventoryonlytotheextentthatthe Example(iv)illustrates proceedsfundsareexpendedaftertheDsfundshavebeennotionallyexhausted acomingledaccountcontainsproceedsandnon proceeds$ Dwithdraws$20,000 ownmoneyfirstpresumptionapplied$10,000.00ofDsown moneydepositedat(c)intheNONPROCEEDSCOLUMNisused first then$10,000.00fromproceedsbalanceat(c)INTHE PROCEEDSBALANCECOLUMNusedtopurchasethe $20,000.00of inventorythusreducingtheproceedsto $15,000.00 SPwillhaveaproceedsclaimagainsttheinventorytotheextent of$10,000ANDaproceedsclaimtotheremaining$15,000 PROCEEDSbalanceintheaccount ifDhaspurchasedotherpropertyrule8applies
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5)IfDsaccountingrecordsmakeitimpossibleorimpracticaltoapplythelowest intermediarybalancerule,thecourtmaydeterminethattheconnectionbetween theproceedsdepositedintothemixedfundandthepropertypurchasedisso tenuousthatthereisnolongeranycloseorsubstantialconnection.Atthis point,theSIinproceedscomestoanend 6)FUNCTIONALEQUIVALENCETEST Evenifthemixedfundmakesitimpossibleorimpracticaltotracetheproceeds intothenewpropertypurchasedbytheD,ifthepropertypurchasedfromthe mixedfundisfunctionallyequivalenttotheoriginalcollateral,itisopentoacourt tofindthatth...